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Game Theoretic Bidding Model: Strategic Aspects of Price Formation at Stock Markets

Author

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  • Domansky, V.

    (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences, St. Petersburg, Russia)

  • Kreps, V.

    (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences, St. Petersburg, Russia)

Abstract

We consider a simplified model of finance market where two players carry on direct multistage bidding with risky assets (shares). One of the players (the insider) is informed on the liquidation price of a share, the other player knows its probability distribution only. It is shown that the optimal strategy of the insider generates a symmetric random walk of prices of transactions. The result confirms the conjecture on the strategic origin of regular stochastic fluctuations of stock market prices.

Suggested Citation

  • Domansky, V. & Kreps, V., 2011. "Game Theoretic Bidding Model: Strategic Aspects of Price Formation at Stock Markets," Journal of the New Economic Association, New Economic Association, issue 11, pages 39-62.
  • Handle: RePEc:nea:journl:y:2011:i:11:p:39-62
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    References listed on IDEAS

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    1. MERTENS , Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part B : The Central Results," CORE Discussion Papers 1994021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Robert J. Aumann, 1995. "Repeated Games with Incomplete Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011476, January.
    3. Victor C. Domansky & Victoria L. Kreps, 2009. "Repeated games with asymmetric information and random price fluctuations at finance markets: the case of countable state space," Documents de travail du Centre d'Economie de la Sorbonne 09040, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised May 2009.
    4. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
    5. MERTENS , Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part A : Background Material," CORE Discussion Papers 1994020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Hadiza Moussa Saley & Bernard De Meyer, 2003. "On the strategic origin of Brownian motion in finance," International Journal of Game Theory, Springer;Game Theory Society, vol. 31(2), pages 285-319.
    7. MERTENS, Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part C : Further Developments," CORE Discussion Papers 1994022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    9. Victor C. Domansky & Victoria L. Kreps, 2009. "Repeated games with asymmetric information and random price fluctuations at finance markets : the case of countable state space," Post-Print halshs-00390701, HAL.
    10. Victor Domansky, 2007. "Repeated games with asymmetric information and random price fluctuations at finance markets," International Journal of Game Theory, Springer;Game Theory Society, vol. 36(2), pages 241-257, October.
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    Cited by:

    1. Victor Domansky & Victoria Kreps, 2012. "Game-theoretic model of financial markets with two risky assets," HSE Working papers WP BRP 16/EC/2012, National Research University Higher School of Economics.

    More about this item

    Keywords

    multistage bidding; asymmetric information; random walk; repeated games; optimal strategy;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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